When a company grants an employee the right to purchase stock at a discount, it happens through an employee stock option plan. Typically, employers require the employee to stay on a certain number of years before being fully vested.
If given stock from an employer, it becomes vested stock if the employee has the right to keep the stock or its fair market value after leaving the employer, or the employee can transfer the stock to someone else without any restrictions.
A company grants an employee a stock option plan with a five-year vesting clause. The employee cannot take delivery of the stock until the five-year period ends.
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Some companies offer tiered vesting. Employees receive partial stock after a certain number of years, typically one, three, five and ten.
According to Fairmark, “The simplest example of a risk of forfeiture is where you receive stock from your employer but have to give it up if your employment terminates within a specified period of time.”
The IRS uses the described definition to determine tax consequences on vested stock. Please consult a tax specialist for specific IRS rules and regulations.